SEC’s New Proposed Environmental Disclosures

Financial statement disclosures are a key part of any public company’s report. With the ever-changing nature of our world, it is only fitting that financial statement disclosures follow suit.

One thing on the minds of many people today is climate change. As such, on Monday, March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed a change to the required financial statement disclosures that would now require public companies to report on the environmental impact of climate change on their business operations.

In some instances, companies have been reporting on these factors for years prior to this announcement, on the basis of their individual business models. However, this recent announcement is the first time that a standardized disclosure of this nature has been proposed by any regulatory agency as it relates to public financial reports. This proposed change stems from the general public’s growing interest and concern for our global climate and the corporate carbon footprint that these large public companies have on our environment. 

There are three “scopes” of data relating to environmental disclosures, as the proposal currently stands. “Scope 1” relates to the disclosure of the company’s own greenhouse gas emissions. “Scope 2” relates to the disclosure of how much energy the company consumes. Finally, “Scope 3” relates to the disclosure of emissions generated by the company’s customers and suppliers.

“Scope 3” has proven to be the most controversial topic of disclosure for these public companies given the cumbersome nature of reporting on other companies’ emissions alongside their own. The SEC’s response to the hesitation of a “Scope 3” requirement has resulted in a determination of materiality regarding customer and supplier emissions. 

If this proposed change is passed and becomes a formal SEC regulation, the reporting rules would be phased into use. A new registrant with the SEC would be required to provide climate-related information upon their registration as a public company. These companies would be required to include this information in all future publicly filed reports. As it currently stands, the target date to have all public companies disclosing these environmental impact factors would be 2024 at the earliest. 

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